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Schedule an informal meeting with the errant employee. Be as direct as possible in the meeting. Sincerity is needed. So is empathy, but the employee needs to get the message clearly and concretely. Begin by letting the employee know that you are on his side. That is, after all, why you are trying to nip the problem in the bud. This will defer defensiveness and encourage him to listen to you.
From there, explain the problem. By letting the employee know how his work performance is affecting the company, his co-workers and the project, the need to improve will become more clear than if you simply state that work should improve. From there, give specific improvement goals. For instance, tailor weekly goals that are tangible and measurable that will let you both see how the employee is or isn't improving. The employee can then agree that this is fair. Many employers keep feedback and the progress they perceive an employee making from him. This is counterproductive if someone thinks he is doing a good job while he performs poorly. Instead of giving him enough rope to hang himself, this is the guidemap for how to save his job. An employee who truly wants his job will appreciate the feedback and ways to save it.